New Codes of Conduct for insurance intermediaries will help maintain Bermuda’s reputation for regulatory excellence

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In February 2019, the Bermuda Monetary Authority (BMA) published its ‘Insurance Brokers and Insurance Agents Code of Conduct’ (the Code). The Code was issued pursuant to powers under Section 2BA of the Insurance Act 1978 (the Act) and will apply from 1 January 2020, to all insurance brokers and agents registered under the Act. The Code will help underpin the jurisdiction’s claim to regulatory excellence and adherence to international standards.

The Code

The Code covers many areas that are already supervised, including the need to:

Maintain indemnity insurance, adequate accounting and other records

Conduct business in a prudent manner

Ensure that controllers are fit and proper

However, it increases oversight in some areas and extends supervision to aspects of a broker or agent business that the BMA had not previously sought to supervise.

Corporate governance

The Code now imposes a positive obligation on brokers and agents to keep a documented corporate governance framework. This includes having policies, processes and controls that the BMA considers appropriate given the nature, scale, complexity and risk profile of the broker or agent.

Clarification of 'prudent manner'

The minimum requirement, in the Act, that the business of the broker or agent be conducted in a ‘prudent manner’, has been confirmed by the Code as requiring:

Governance, management structures and operational controls – such as charters and policies relating to the composition, level and type of control exercised by a board.

Strategy, objectives, and planning arrangements.

Controls, policies and procedures.

Pre-vetting processes and policies designed to address risks that are inherent in introducing new entities and individuals to Bermuda’s corporate environment.

Accounting policies, receivable collections and a bad debt policy.

Policies governing staff selection, vetting and training.

A physical presence in Bermuda that is appropriate for an agent or broker.

The requirement for pre-vetting processes and policies to address the risks inherent in introducing new entities and individuals to Bermuda’s corporate environment is a particularly interesting development, as is the requirement that, as a matter of insurance regulation, brokers and agents maintain an appropriate physical presence in Bermuda. This latter requirement makes perfect sense given that, under the Economic Substance Regulations 2018, entities registered under the Act are deemed to meet economic substance requirements just by virtue of complying with the Act, its associated rules, regulations and codes of conduct and the Companies Act 1981. Plainly, it needs to be clear that the Act, rules, regulations and codes include the necessary requirements as to substance, for all registered entities.

Client relationships

Client relationships are now subject to more scrutiny, including the Code’s imposition of positive regulatory duties on brokers and agents:

To act with due skill, care and diligence.

Not to recommend a transaction unless reasonable steps have been taken to make the client aware of the risks involved, including any conflicts of interest.

To disclose their fee structure.

To enter into terms of business agreements (TOBAs) with clients.

Furthermore, under the Code, clients must be provided with:

A clear description of the services to be provided.

A description of the manner how, and the persons who can, make requests for actions and or give directions under the TOBA.

Details of cancellation rights under the TOBA.

Brokers and agents also now have a regulatory duty to make full and adequate disclosure of all facts necessary for their clients to make an informed decision when purchasing insurance. Among other things, the broker or agent should give the client a statement of ‘significant features and benefits’ of the insurance contract, details of premium and taxes payable, details of relevant cancellation rights and the process for notifying claims.

Note, however, that many of these client-facing duties are probably more relevant to brokers than agents, whose clients would not normally be considered as needing the same level of regulatory protection.

Principle of proportionality

As it does in assessing compliance with the ‘Insurance Code of Conduct’ (for insurers), the BMA will apply a proportionality principle in assessing compliance with the Code, recognising the varying risk profiles of brokers and agents, depending on their operational model, services offered, and the nature, scale, and complexity of their business.

Comment

With the publication of the Code, the regulation of insurance intermediaries in Bermuda has taken some strides in the direction of the more granular, conduct-focused regulation that is familiar in many onshore jurisdictions with developed insurance markets. However, the level of supervision is better tailored to the needs of the Bermuda market, and reflects the prevalence of sophisticated customers. As noted above, compliance will be assessed in a proportionate manner, so that intermediaries whose business is simple in terms of structure, small in scale and involves services with a low risk profile may be held to less onerous standards than intermediaries with large, complex books.

A draft code of conduct for insurance market places was published in May 2019, in substance very similar to the Code. It is expected that a revised version will be issued shortly, in the wake of the introduction of the new insurance marketplace provider licence class, in August 2019.